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2 Deciphering indemnity clauses in commercial contracts 28 September 2017 Presented By: Emily Shoemark, Senior Associate Caitlin Meers, Lawyer Snedden Hall & Gallop Lawyers Association of Corporate Counsel 2

3 What are indemnity clauses? An indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party Mason CJ in Sunbird Plaza Pty Ltd v Maloney (1987) 166 CLR 245 A contract of indemnity is a contract by one party to keep the other harmless against loss and is not dependant on the continuing liability of the principal debtor Gleeson JA in Canty v Paperlinx Australia Pty Ltd [2014] SNWCA 309 3

4 What are indemnity clauses? Indemnity clauses are provisions that purport to exempt one party from civil liability which the law would otherwise impose upon it. They are provisions that shift to another party the civil liability otherwise attached by law to the first party. Self-evidently this is a serious thing to do or to attempt to do. Kirby J in Andar Transport Pty Ltd v Brambles Ltd (2004) 317 CLR 424 at 452 4

5 Bare indemnities v reflexive indemnities Bare indemnity: A indemnifies B against all liabilities or losses incurred in connection with a certain event or circumstance. A indemnifies B against claims or liabilities by C Reflexive or reverse indemnity: A indemnifies B for loss arising from B s own fault. 5

6 Why include an indemnity clause in a contract? Protection against risk Remoteness of damages Limitation Mitigation of loss 6

7 Breach of contract Claims by 3 rd parties No fault Reflexive Common types 7

8 Hold harmless or make good? Sunbird Plaza Pty Ltd v Malonely - a promise by the promisor that he will keep the promise harmless against loss as a result of entering into a transaction with a third party. Andar Transport Pty Ltd v Brambles Ltd - indemnities are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person 8

9 Drafting tips Tailored to suit the specific circumstances initial questions to scope the indemnity 9

10 Drafting tips 1. Who is providing the indemnity? 2. Who is protected by the indemnity? 3. What is the source if any potential loss or damage ie what events are covered? 4. What is the extent of the potential loss or damage? 5. What is the trigger event for obligations to indemnify? 6. What is the duration of the indemnity? 7. What is the ability of the indemnifier to meet any obligation under the indemnity? 10

11 F&D Normoyle Pty Ltd v Transfield Pty ltd [2005] NSWCA 193 The sub-contractor shall indemnify and keep indemnified [the Joint Venture] and their respective officers, employees and agents against all claims, demands, proceedings, liabilities, costs, charges and expenses arising as a result of any act, neglect or default of the sub-contractor, its employees or agents relating to its execution of the Works. 11

12 The causal connector choose your words wisely in relation to arising out of in connection with caused by As a direct result of directly cause by 12

13 Both sides of the transaction Issue Indemnifier Indemnified Limitation of liability Indemnity for breach of contract Fault? Proportionate reduction in liability for contribution to loss by indemnified party Financial cap Avoid can extend limitation and damages available Fault based indemnity only as a result of a negligent act or omission Full indemnity No cap Include limitation, damages General indemnity regardless of fault any loss or damage arising out of the contract 13

14 Both sides of the transaction Issue Indemnifier Indemnified Capacity to meet indemnity Causal connection Type of loss Is the indemnity consistent with insurance policies? As narrow as possible caused by, directly resulting from Define the types of loss, or exclude types of loss Term Limited to life of contract Ongoing Want to ensure indemnifier can pay As wide as possible in relation to, arising out of Keep general loss and damage suffered 14

15 Pitfalls Using precedent clauses or cut and paste What is the actual risk trying to be protected? Choose your words carefully 15

16 Questions? 16

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